Overcoming HK's economic woes

Last year, FDI flows into Hong Kong dropped by more than 20 percent, whereas they increased by more than 20 percent into Shanghai. With the launch of Shanghai's Free Trade Zone, some of the FDI that used to go to Shanghai via Hong Kong are moving directly to Shanghai.

According to the International Institute of Management Development, Hong Kong recently lost its status as the world's most competitive economy, falling behind the US and Switzerland. In competitiveness among cities, it has dropped from being China's second most competitive region to the fifth. Furthermore, Hong Kong's high-tech sector's percentage in its exports has shrunk.

Further, since the global financial crisis, Hong Kong's prospects have been overshadowed by record-low US interest rates and "hot money", in part driven by spillovers from the mainland, which has increased property prices.

With the US Federal Reserve expected to tighten its monetary policy in the near future, financial risks are likely to increase in Hong Kong's property market. This is not good news for Hong Kong, because instead of pushing new emerging industries and looking into the future, it relies on its old economic legs, such as finance, logistics, trade, tourism and professional services. The latter evolved when the mainland was still a low-income economy. But with the mainland becoming a middle-income economy, competition has intensified.

To sustain its high prices and costly living standards, Hong Kong needs to foster its high-end advantages soon. Most importantly, the city could upgrade its economic advantages through deeper integration into the Pearl River Delta region's economy, which hopes to replicate Shanghai's FTZ advantages in the future.

For three decades, Hong Kong has grown with Beijing's support and mainland savings. Today, the mainland accounts for 54 percent of its exports and 47 percent of imports. If one were to take away the mainland's role in Hong Kong's trade, investment, financial markets and initial public offerings, Hong Kong's economy would be in severe jeopardy.

Flirting with a political cul-de-sac will not make economic realities any easier, but more challenging. It's precisely the wrong stance to take at the wrong time.

Once Hong Kong thrived without the mainland. Tomorrow, it can excel with the mainland. It doesn't have to feel unhappy, for it can share the future.

The author is research director of International Business at India China and America Institute (USA) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

(China Daily 12/11/2013 page9)